Markets: Boiling Point
New York: October 13, 2008
By John R. Stephenson

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe you should risk those assets in the stock market.”

--Jim Cramer — CNCB stock market commentator and author

“This is the worst financial crisis since the Thirties.”

-- Guy Quaden — Belgian representative to the ECB

It wasn't supposed to work out this way. Massive injections of cold hard cash into the financial industry were meant to bring us back from the brink of disaster. Or so we were told. But after one stomach churning session after another, our nerves are frayed. So, what has gone so wrong? Everything, it seems. Global equity markets have been selling everything in sight and making paupers out of us overnight.

It wasn't supposed to work out this way. Massive injections of cold hard cash into the financial industry were meant to bring us back from the brink of disaster. Or so we were told. But after one stomach churning session after another, our nerves are frayed. So, what has gone so wrong? Everything, it seems. Global equity markets have been selling everything in sight and making paupers out of us overnight.

Stock markets around the world have temporarily closed as sell orders have swamped the exchanges. The stock exchange in Indonesia has been closed indefinitely and in Russia closing has become an almost daily exercise.

Volatility in the market is fluctuating wildly and the only investment that seems to be working is a flight to safety into US treasuries. Consensus earnings estimates for the S&P500 and the S&P/TSX stock indexes are still too high and these estimates will have to be lowered in the months to come. The United States is most certainly in recession, as are the major economies of Europe and Japan. Collectively, these economies account for 55% of the global GDP.

Bailouts have followed interventions, with limited impact on the stock market as investors have gambled that the worst may still be ahead of us. The result of these financial interventions has been a ballooning in the size of the balance sheet of the US Federal Reserve. In the last month alone, the Fed has increased its balance sheet by some $600 billion. Yikes! This has investors globally fretting that to pay for all of these interventions and bailouts, the central bank of the US will be forced to print money, a situation that would lead to a decline in the currency.

In the last few weeks, the American monetary base has expanded by $65 billion leading investors to worry that the Fed is, in fact, printing money to pay for some of their activities. That is a worrisome sign which has gold bugs rubbing their hands in glee as they sense another day in the sun for gold.

Figure 1: The Monetary Base in the US is Accelerating - A Troubling Sign!

Source: RBC Capital Markets

No doubt there are troubling signs out there in investment land. But was Jim Cramer right and should investors be abandoning ship? For my money the answer is an unqualified no , if, for no other reason, than the worst of it is already behind us.

But with each passing day, we are closing in on an unbelievable buying opportunity. While the markets will go sideways and perhaps a little bit lower over the next few years, pretty much everything is for sale and will stay in bargain land for the foreseeable future. And that's good news to investors who have lots of cash in hand. If you don't have cash, then you should covet your high-quality dividend paying stocks which will be the first stocks to recover when the dust settles and we can finally get on with the job of rebuilding the global economy.

Figure 2: We Are Getting Close to the Bottom!

While it is still too early to jump back in, the savviest investor around is just starting to dip his toe back in the water. In the last month, he has bought big stakes in Goldman Sachs and General Electric, two of the best companies around. Warren Buffett amassed the bulk of his fortune by buying the best companies in America in the 1970s and early 1980s when the market put them up for a clearance sale. And look what Mr. Buffett is doing these days - he is buying aggressively once again. When the dust finally settles, those investors who have cash or highly liquid securities will be in the position to reap a great fortune.

Good times have always followed bad times and they will this time as well. Right now, the stock market is selling everything that it can get its hands on, but this too shall pass. The world still needs to eat and to buy copper, gold, oil and natural gas. To be a seller of the companies that produce these valuable commodities in today's market, you have to believe that the world is coming to and end and that globalization is completely dead.

I don't! Nor should you. This is a time to stack the deck in your favor and get in ahead of the herd into the companies that produce some of the things we need most in this world — commodities. Commodities are real things that you use every day, and at the current valuations, these companies are dirt cheap. Not only that, but they have plenty of cash on their balance sheets and none of the off balance sheet issues that have been plaguing the banks.

Your action plan should be to increase cash holdings so you are in a position to start to buy aggressively when the market troughs. As well, you should start to dip your toe back into the market by picking away at the great commodity stocks that are massively on sale right now.

The oil story, while hobbled, is still looking good as there hasn't been a major discovery of a million barrel per day oilfield in over 35 years. Within the decade, Malaysia, Indonesia and the United Kingdom will go from being oil exporters to oil importers as their fields start an irreversible decline in production. Oil sands producers with their long reserve lives would be an area to look to build a major position for your investment portfolio.

Another area to look to get increased exposure is within the global fertilizer space. The rational is simple — they just aren't making any more land and the amount of arable land globally has not increased in any meaningful way in over twenty years. The only way that farmers can feed the surging global population is to add fertilizer to their fields which has been proven to dramatically increase the yields of farmer's fields.

It has been a trying time for investors lately. As investors the hardest thing to do is to take the plunge when everyone is rushing out of the water. But, that's exactly what you need to do if you want to establish a beachhead of personal wealth. Academics have proved that the single greatest asset class is stocks. Lately, they've been about the worst. The tide will turn and stock investors will once again have their day.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article